30 January 2006 External T.I. 2005-0156741E5 - Personal Services Business

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: In the context of incorporating a professional practice, would a newly incorporated professional corporation be carrying on a personal services business if the professional corporation and the professional were not allowed to compete with the corporation to whom the professional services are provided?

Position: Insufficient information to conclude. However, the competition restrictions are one indicator that the incorporated employee [i.e., the incorporated professional] would reasonably be regarded as an officer or employee of the corporation to whom services were ultimately provided. Depending on all of the relevant facts, this could result in a determination that the professional corporation is carrying on a personal service business.

Reasons: Reading of the legislation.

							2005-015674
XXXXXXXXXX 						Allan Nelson, C.M.A
(613) 443-7253
January 30, 2006

Dear XXXXXXXXXX:

Re: Incorporating a Partnership
Technical Opinion Request

This is in response to your letter dated October 31, 2005, where you refer to our advance income tax ruling #2004-008431, dated November 16, 2004, (the "Ruling"). In a hypothetical unrelated situation, you asked us to opine as to whether a professional corporation (the "Contracting Corporation") would be carrying on a "personal services business" if the facts were similar to those in the Ruling except that there were certain competition restrictions imposed between the relevant parties.

As explained in paragraph 9 of Information Circular 70-6R5, dated May 17, 2002, an advance income tax ruling applies only to the taxpayer(s) identified in the ruling and to the transactions specified. Also, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. As such, we cannot confirm whether a Contracting Corporation providing professional services to a new corporation ("Newco"), as described in your hypothetical example, would be carrying on a personal services business. However, we are prepared to offer the following comments, which may be of some assistance to you.

Personal services business carried on by a corporation in a taxation year is defined in subsection 125(7) of the Income Tax Act (the "Act") to mean

...a business of providing services where

(a) an individual who performs services on behalf of the corporation...referred to as an "incorporated employee",

...would reasonably be regarded as an officer or employee of the person or partnership to whom or to which the services were provided but for the existence of the corporation, unless...

(c) the corporation employs...more than five full-time employees, or
(d) the amount paid...to the corporation...is received...from a corporation with which it was associated in the year;

Determining whether a corporation, such as a Contracting Corporation, is carrying on a personal services business involves a question of fact that can only be determined after a review of all the relevant information and legal agreements.

One of the factors in making the above determination would be whether the Contracting Corporation and the incorporated employee are allowed to compete with Newco. If not, this can be one of the indicators that

(i) the incorporated employee would reasonably be regarded as an officer or employee of Newco but for the existence of the Contracting Corporation, and

(ii) consequently, the Contracting Corporation is carrying on a personal services business.

In this regard, it may be useful to refer to the Canada Revenue Agency's guide entitled "RC4110 - Employee or Self Employed?". The guide includes a detailed discussion of the numerous factors considered in determining whether a particular individual is an employee or self employed. You can obtain a copy on our web site at www.cra-arc.gc.ca.

We hope the above will be of assistance to you.

Yours truly,

Robin Maley
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch